Four Reasons to Buy Hess

The freedom to move forward to new opportunities and to produce results comes from living in the present not the past. --Brian Koslow

I hope everyone has their shopping lists ready today: It looks like the market will hit the first major bump in December on the way to the resolution of the fiscal cliff. One stock I will be looking to increase my position in should we see a significant selloff today is Hess (HES). This energy concern has been a laggard in my portfolio this year but has behaved better recently. It also has had a slew of positives around future production capacity.

Key recent positives for HES:

The company has gotten positive results from five wells off Ghana, which is emerging as a promising new energy exploration region.

Libyan production is coming back. The company averaged 23,000 BOE per day (barrels of oil equivalent per day) in the third quarter. This compares to the average of 4,000 BOE per day in 2011.

Continental Resources (CLR) recently upgraded its estimate for its recoverable reserves in the Three Forks Shale formation by better than 50%. CLR is the biggest Bakken energy producer and the Three Forks reserves sit directly under the Bakken formation. Hess owns some 800,000 net acres in this region and this positive assessment could potentially add 1 billion in recoverable BOE to Hess's total if applied uniformly. HES has already almost doubled production from this region, year-over-year, with current production of 62,000 BOE per day.

In addition to some positive news around future production, HES is just plain cheap from a valuation perspective.

Four reasons HES is a bargain at $53 a share:

HES sells at just 88% of book value. Similarly sized competitors, including Marathon Oil MRO, sell at more than 120% book value. Major energy concerns such as ConocoPhillips COP sell at more than 150% of book value.

The stock sells for less than 4x trailing annual operating cash flow and around 8.5x forward earnings, a significant discount to its five-year average (17.1). The shares also has have net insider buying over the last six months.

After missing earnings estimates for four straight quarters, Hess has crushed estimates on the bottom line in each of the last two quarters. The company has 75% of its production tilted towards oil and liquids, the rest being natural gas.

Finally, the company still has its refining and marketing operations. Both Conoco and Marathon unlocked significant shareholder value when they spun those units off to shareholders over the last year. Hess's operations are a little more complicated because it operates several joint ventures in this space. But if the company followed a similar path, its shareholders would see a significant increase in the value of their holdings.